How Will President Trump Change Bankruptcy?

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No doubt, the presidential election of 2016 will go down as one of the most contentious battles and one of the most surprising outcomes. Donald Trump, having never before been elected to a governmental office, found himself in the most extraordinary circumstance: the newly minted leader of the free world. Since his inauguration, he has wasted no time taking action on a variety of fronts through executive orders and through the appointment of his cabinet, some of whom are themselves, business leaders, with little or no experience in government.

The chief executive can have a significant impact on the bankruptcy process through legislation, through his own Justice Department and even though his federal court appointments.

Legislative Agenda

Despite what much of the blogosphere would have us believe, Donald Trump never filed personal bankruptcy. Since 1990, 6 of his companies filed Chapter 11 bankruptcy. Chapter 11 is not what most people think of when they consider bankruptcy. Chapter 11 allows a business (and sometimes an individual with a lot of assets and a lot of debts) to reorganize its obligations while it continues doing business. In Chapter 7, the individual or company that files the case liquidates. A court officer called a trustee will sell off all of a company’s assets and some of an individual’s assets and use the proceeds to pay creditors. Donald Trump, as an individual, never filed either a Chapter 11 or Chapter 7.

That is not to say Mr. Trump is not familiar with the process. No doubt he is. The Bankruptcy Code was most recently overhauled in 2006. The legislation called the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), was pushed through Congress as the instigation of the credit card industry. BAPCPA essentially made the bankruptcy process less consumer-oriented and more protective of the interests of the credit and banking establishments. For instance, it brought to fruition a means test that purports to ferret out those debtors (the persons filing the bankruptcy) who would prefer to file a Chapter 7 case but have some assets or income enough to pay some of their debts.

Along with the Means Test, Congress also added provisions that require prospective debtors to engage in a credit counseling session prior to filing and a financial management course after filing. BAPCPA also made it more difficult for debtors to use bankruptcy to renegotiate high-interest rates on recent car loans.

Mr. Trump has not announced any legislative agenda for enacting further bankruptcy restrictions, although he has made it known that he is not a friend to the consumer. For instance, he has been harshly critical of the federal government’s Consumer Financial Protection Bureau, only just established in 2010. Likewise, some indicators say that he intends to strip the Federal Communications Commission of its role in consumer protection. He is also reportedly formulating a plan to reduce or eliminate much of the consumer-oriented regulatory underpinnings of the federal banking system. As a preview, consider Mr. Trump’s first executive order after his inauguration which blocked a scheduled reduction in rates on FHA-backed mortgages.

Executive Action

There are no plans at present to make extensive changes to parts of the Bankruptcy Code that affect consumer cases, although reforms have been proposed for Chapter 11. That does not mean that we can breathe a sigh of relief. As we saw with Mr. Trump's spate of executive orders, there is much he can accomplish without actual changes to the laws on the books. In fact, Mr. Obama likewise made use of the executive order to affect consumer-related issues like student loans

Beyond executive orders, much of the bankruptcy process is in how the courts and the Justice Department administer and interpret the laws that are already on the books. Although the bankruptcy courts are headed by bankruptcy judges, much of the work of the court is actually performed by an independently appointed official called a trustee. Trustees are appointed in Chapter 7 straight bankruptcies, where they are charged with the duty of gathering non-exempt property, which the trustee will sell. The proceeds are distributed among the creditors who have valid and provable claims. Trustees are independent of the judiciary and are appointed by the Justice Department, specifically the Office of the US Trustee. Bankruptcy policy is often effectuated through the trustee’s relationship with the US Trustee and with the debtors themselves.

For instance, the Means Test mentioned above does not create a bright-line result that allows some debtors to file a coveted Chapter 7 case but funnels other debtors into what some people consider a less desirable form of bankruptcy called Chapter 13. Chapter 13 requires the debtor to pay back at least a portion of his obligations over a period of three to five years. Instead, the Means Test is an indicator. It indicates whether a debtor is presumed to be abusing the bankruptcy system because he has enough income to make some payment to his creditors.

The debtor can overcome the presumption of abuse by presenting evidence that the Means Test calculation does not take into account. Whether the debtor will ever have to overcome that presumption depends on whether the trustee, the creditors or the bankruptcy judge challenges his right to file a Chapter 7 case. Creditors rarely make that challenge. The trustee is the front line defense (or offense) on this issue and he has a significant amount of discretion in whether he pursues the issue. Some of that discretion reflects administration policy, as filtered through the US Trustee’s office. A hardline policy initiative would have trustees cracking down on the presumption of abuse cases. All it takes is a nod from the chief executive.

Likewise, another provision in the Bankruptcy Code could lead to a random audit of a debtor’s case. In every bankruptcy case, the debtor provides information about his debts, assets, income, and expenses. Until BAPCPA, the debtor’s schedules were only questioned if the debtor’s testimony under oath differed from what he listed on paper, or a creditor (and sometimes an ex-spouse) had information that contradicted the debtor’s schedules. As it contemplated bankruptcy reform, Congress decided to include in BAPCPA a provision that would require the US Trustee’s office to contract with auditors who would audit the schedules and compare them to the debtor’s records and other resources, and in some cases would even go so far as to inventory the debtor’s possessions in his home.

When the audit program began, each judicial district was to designate at least one case for every 250 filed. During the recession, however, the US Trustee’s office cut back on the audit program due to budgetary constraints. The current number of audited cases today is more like one in 2,500. As long as the US Trustee has the budget for it, the US Trustee can put the screws to any, and in fact all, bankruptcy filers. Again, this could be a result of a policy shift in the administration or within the Justice Department that does not require action by Congress.

The new Attorney General Jeff Sessions was a senator from the state of Alabama. His voting record shows a definite bias in favor of more stringent bankruptcy laws and against laws and regulations designed to protect consumers. Ideologically, it would seem that Mr. Sessions, who has direct authority over the US Trustee’s office, is very much aligned with Mr. Trump, and may even lean more to the right.

Judicial Influence

Finally, another way Mr. Trump can influence bankruptcy practice is through appointments to the federal judiciary, including the US Supreme Court, Courts of Appeal and the district trial courts.

Bankruptcy in the United States is governed by the federal Bankruptcy Code through a federal court system. For those of us who deal extensively with the federal courts and bankruptcy, in particular, Mr. Trump’s treatment of the court system has been particularly noteworthy. In his dealings with the courts over his immigration policies and the executive order affecting travel from certain middle eastern countries, he has shown what appears to be a certain lack of understanding of how federal courts operate, the scope of their constitutional authority and the workings of the checks and balances built into our form of government.

Bankruptcy courts are courts created by legislative action but operate under the supervision of the federal (Article III) system. As the executive, Mr. Trump has no direct authority over the bankruptcy courts. He would not, himself, nominate bankruptcy judges like he would district or appellate judges or Supreme Court justices. 

At this writing, Congress is about to consider Neil Gorsuch for appointment to the Supreme Court to fill the vacancy left by the passing of Justice Antonin Scalia. The Court has been operating one justice short for a year, roughly divided four to four along ideological grounds. Assuming that Judge Gorsuch will be next justice of the Supreme Court, the blog Credit Slips recently reviewed cases he decided while serving on the US Court of Appeals for the Tenth Circuit. As the blogger Jason Kilborn stated, comparing Gorsuch to his presumed predecessor,

A simple takeaway from all of these cases is that Gorsuch is not at all what one might call “debtor-friendly.” In fact, I don’t think one of the dozen-or-so opinions I found ruled in favor of the debtor(s).

It is virtually certain that the Trump administration will do little or nothing to lighten the burden on beleaguered debtors. Changes to the way we handle bankruptcy cases may not be at the top of the Trump's first 100-day list of accomplishments, but there is much he can do with the stroke of a pen or a word to his Attorney General.